What Is Alphabet's Fair Value?

Alphabet has been a high-growth stock in the last few quarters, with its market price surging from under $800 at the beginning of last year to nearly $1,200 earlier this year before falling to current levels of around $1,020. Alphabet’s net revenues have continued to increase, driven by Google’s core search advertisement business. Additionally, non-core segments have also reported massive growth in revenues of late. The company’s revenue growth has been complemented by slight improvement in margins, with the exception of 2017 when profits plummeted. We expect Alphabet to maintain its revenue growth trajectory, and forecast the company’s margins to return to 2015 and 2016 levels. We have summarized our expectations for Alphabet’s 2018 results, which form the basis of our $1,113 price estimate for the company on our interactive dashboard platform. You can change expected segment revenue and net margin figures for Alphabet to gauge how changes will impact its value.

Strong Revenue Growth to Continue

Alphabet’s net revenues increased by over 20% annually in 2016 and 2017 to $90 billion and $111 billion, respectively. This was largely due to its core Google properties (search ad and related) revenues increasing at the same pace to $64 billion and $78 billion through 2016 and 2017, respectively. We forecast the trend to continue through 2018, with high-teens growth in Google properties revenue and Alphabet net revenue.

Trefis

On the other hand, Google Network Members’ Properties revenues, which include revenues generated from Google search engine’s network website partners, have increased at comparatively modest rates in the same period. We forecasts these revenues to increase in the mid single digits through 2018 to just over $18 billion. Alphabet’s other revenues (apps, in-app purchases, digital content, smartphones, licensing, Google Cloud offerings such as Docs) have grown massively at over 40% in recent years. This trend should continue in the coming years as well. We have a conservative forecast of 25% revenue growth in this segment to just under $18 billion in 2018.

In terms of profits, Alphabet’s net margin stood at around 29% through 2015 and 2016. This figure fell significantly to 18% in 2017 for two main reasons. First, the total tax paid by the company surged due to one time charges under the Tax Cuts and Jobs Act. Secondly, the company was fined€2.4 billion (nearly $3 billion) by the European Commission last year for favoring advertisers that used its services to display and rank their shopping search results higher in listing. We expect its net margin to rebound to around prior levels this year at around 27%, implying net income of about $35 billion and EPS of almost $45 per share. Our forecasts are slightly higher than consensus estimates.

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs

Led by MIT engineers and Wall Street analysts, Trefis (through its dashboards platform dashboards.trefis.com) helps you understand how a company's products, that you touch, read, or hear about everyday, impact its stock price. Surprisingly, the founders of Trefis discovered...